The NAO reported that the nationalisation of Northern Rock in early 2008 offered the best prospect of protecting the taxpayers’ interests and was based on a sufficiently robust analysis of the options available. However, it states: “...the Treasury was stretched to deal with a crisis of this nature and there were lessons to be learned”.
It continues that: “…the Treasury could have been more engaged with the actions being taken in the early stages by Northern Rock. As a condition of public support, mortgage lending was reduced but the company still went on writing high-risk loans up to 125 per cent of a property’s value. Mortgages of this type have a higher default rate.”
The NAO’s report highlights that, given the extent of the financial assistance provided from October 2007, “…the Treasury could have sought to introduce further conditions to limit the company’s activities, for example on the risk profile of lending undertaken”. It states that “Northern Rock continued to write Together mortgages of up to 125% of a property’s value throughout the period that it was receiving emergency support, albeit at a reduced volume.
“Between September 2007 and February 2008, over £1.8 billion of Together loans were written, around 30% of total mortgage lending, compared with just under £5 billion (26% of total mortgage lending) in the preceding eight months of 2007. Around £1 billion of these new mortgages reflected commitments made by the company to potential borrowers prior to September 2007.
“As part of the company’s stabilisation plan, the terms for Together loans were tightened by the company in October and November 2007. At 31 December 2008, Together mortgages represented around 30% of the mortgage book but about 50% of overall arrears and 75% of repossessions. The Treasury judged that mortgage transactions were necessary to maintain the business while a longer term solution was sought.”
